The application of the general equilibrium paradigm
to the analysis of the transition from command to market economy is
quite natural. By definition this process can be considered as a
movement from a shortage, inventory burdened economy, to a balanced
and efficient one.

The general equilibrium theory formulates and
describes the possibility, uniqueness, behavioral foundation and
stability of the simultaneous equilibria at all markets, given the
specific utility functions and production sets (Takayama:
1985:169-74). The most part of the models do not take account of
the cost of collecting information during tatonnement or
non-tatonnement process. They also presuppose constant number of
firms and exchanged goods, constant technologies and stable
institutional structures. In other words, they exclude just the
problems, which are of greatest interest from the transition point
of view.

Although some attempts are done to adapt the general
equilibrium framework to the realities of the post communist
economies, including explicit introduction of rigidities, not
permitting the prices to balance the supply and demand and thus
leading to inventory strategies and shortages
(Weitzman:1991:401-14), they cannot overcome the boundaries of the
second best approach and create a stable basis for a comprehensive
theory of transition. An other shortfall of the classical general
equilibrium analysis is it's failure to take into account the
existence of the complex mutating organizational and institutional
structures. The "optimal ignorance" approach is to some extent the
exception, that proves the rule in the sense, that by including the
cost of adjustment one excludes the possibility of perfect
equilibrium and thus reduces it's status to an inachievable goal
(Davidson;Hall: 1991:244). On the other hand, the introduction of
the utility non-linearity in information" implicitly implies
uncertainty under the form of risk indifference (Christensen:
1983:408-9).

Nevertheless, the cost of information concept is
extremely important in the context of transition learning
process.

Finally we can conclude, that without reformulation
of some of it's traditional assumptions, the usual specification of
the general equilibrium optimization framework is not directly
applicable to the transformation issues of the command economic
systems. The problem is, that the transition presupposes an other
type of equilibrium - in the typical neoclassical world
resources

The transition as a catastrophe: from theory to
policy

are scarce, but the information abundant. The
inverse should be expected in the mutating post-communist
countries. Under transition the equilibrium is not a state, but a
moving costly target.

1.1.2. The Modern Austrian School

The "market process" approach has many applications
in the field of the comparative analysis of the command and market
economic systems. The modern Austrians are interested in the
economic development and the information role of disequilibrium
prices.

The prices are knowledge "surrogates", they can also
infer knowledge and provide profit opportunities for the
entrepreneurial discovery process (Thomson: 1992:60-62).

Contrary to the general equilibrium conventional
wisdom, Neo-Austrians see the main flaw of the command systems not
in the absence of market clearing prices, but in the lack of
entrepreneurial incentives and the impossibility to create rational
hierarchical organizational structures. As to the latter, there is
strong evidence supporting this conclusion, but the former is less
convincing. In fact, incentives (not necessarily under the form of
pecuniary incomes) and possibilities for entrepreneurial activities
are present, even to a greater extent, then in market economies-
the whole system of central planning is by definition subordinated
to the entrepreneurial "discoveries" of the central planner. The
problem is, that without neoclassical price environment, the
society cannot distinguish between efficient and inefficient
decisions.

In brief, the unreliability of the endogenous
information makes the imitation of the market economies the only
viable strategy for command economies. The evolution of such
economies is an interplay between inefficient endogenous
"discoveries" and market system imitation.

Clearly, the market process vision is extremely
important from the transition point of view, emphasizing the role
of disequilibrium prices, hierarchies and entrepreneurship.

1.1.3. The Monetarist Schemes

The role of the monetarism for reconstructing the
former socialist economies is special both from theoretical and
practical point of view. The concepts of shortage and money
overhang, which are basic for the post-communist economies
understanding, implicitly imply that under transition "money
matters". On the other hand, the monetarist hypothesis about the
stability of the function of the demand for money, based on the
presumption of institutional stability of the economy, is too
strong in the case of transition. As a consequence, such
prescriptions of the orthodox monetarism, as the monetary targets
and ceilings, positive real interest rates, nominal anchors and
hard budget constraints, may be misleading, given the dynamic
environment of the transition.

The transition as a catastrophe: from theory to
policy

The orthodox application of monetarism may lead to a
huge accumulation of bad debts, prolonged depression, bank crisis
and instability at emerging capital and foreign exchange markets. A
non-orthodox monetary policy, based on the obligatory reserves,
priority state budget deficit financing (McKinnon: 1991:55-66) and
more short-term central bank regulations, seems more appropriate.
To summarize, the importance of the monetarism relies on the fact,
that it emphasizes on the non-adaptive character of the velocity of
money, and hence on the possibility and the importance of the
stabilizing monetary policy (Friedman:1991:6-10). The limits are a
consequence of the presupposed stability of the money velocity -
under transition the income velocity of money should be expected to
be a dynamic endogenous variable.

1.1.4. The Keynesian Activism

The high unemployment rate, the low level of
capacity utilization and the existence of a relatively developed
apparatus of state intervention into economy, may be serious
arguments for demand oriented economic policies. The temptation is
especially high after unsuccessful monetarist stabilization program
in the beginning of the transition period. The credit squeeze and
the inventories running down may really produce a typical Keynesian
impasse (Calvo;Coricelli:1992:ll).

The problem here is that in a distorted market
economy with asymmetric information, the increase of demand may
lead, in spite of the resources underutilization, to raise of
inflation. The injection of new sums of money into economy with
high degree of uncertainty, may favor the unproductive behavior and
contribute to the economic slump. To prevent such development, the
state should introduce some kind of price and income policy,
coupled with structural adjustment measures. In the same time, the
demand oriented policy will probably create problems with foreign
trade balance. The best solution to this issue - an export led
growth, is inachievable in short run, given the low international
competitiveness of production. So, only a return to a barter-based
trade may permit non-inflationary economic growth. Finally, the
state may be engaged into an economic policy, which would reproduce
the inefficient economic structure of the past.

It is evident, that a pure keynesian type economic
policy, as monetarism, may work only under the specific conditions
in a mature market economy. This does not mean, that under
transition the effective demand should not be considered as a
possible constraint on the equilibrium convergence process
(Artis:1990:17), but rather that the demand and demand oriented
economic policy must be viewed in a broader context of an
interaction with other constraining factors.

The transition as a catastrophe: from theory to
policy

1.1.5. The Systemic Perspective

The command segment of the world economy can be
considered as a specific semi-peripheral structure, which appears
not only as a result of some internal economic and political
changes, but as a consequence of the evolution of the World-System.
The presence of command economic structures may temporarily
stabilize the world economy, given it's capabilities for a counter
cyclical economic policy and disposition to force economic growth.
As far as the central planning evidently cannot be as sophisticated
as the world economy as a whole and the process of imitation is an
imperfect by definition, the command economies are deemed to an
inefficient functioning and final failure.

Nevertheless, the raise and fall of the command
structures is a more complex issue than this. It is connected with
the development of the international financial system. The transfer
of resources from surplus to deficit economic agents at
international scale, is highly dependent on risk considerations.
This worsens the economic conditions for the economically and
politically most volatile countries and creates a vicious cycle. In
such a situation, and given a low level of international
cooperation, a state interventionist policy may be inevitable.

From political and economic point of view, the
evolution of the core economies is of crucial importance. The
change of the world leadership in the context of the hegemony
cycles and long waves, creates situations of instability, economic
crisis and lack of cooperation (Goldstein:1988), which facilitates
the raise of economic and political radicalism (for historical
description, see Appendix 1). Finally, the fact that the countries
with middle level of economic development experience the higher
level of vacillation between the authoritarian and democratic
political systems (Arat:1987) explains the most probable space
location of command economies. So, the World-System approach makes
possible the theoretical explanation of the time and space
coordinates of the emergence of the command economies.

As a consequence of this logic, the transition from
command to market economy should also be a World-System led
process, with historical (Gelb;Gray:1991:l-6) and geo-strategic
factors playing an important role. The former centrally planned
economies have three possibilities - to be integrated into the
core; to be "peripherilized"; and to come back to a new variant of
command system. The result, (not necessarily the same for different
countries), will depend on the policy of the core, the level of
international cooperation and the success of the transition
strategies.

Finally we can conclude, that the systemic approach
gives us an useful analytical tools. However, it fails to create a
basis for pragmatic transition economic policy, especially at
national level.

The transition as a catastrophe: from theory to
policy

1.1.6. The Principle-Agent Theory

The dominant state ownership is a typical feature of
the most command economies. This permits to consider the transition
as a change of ownership structure - a radical privatization will
transform the whole modus operand! of the economy. Theoretically
the privatization may be seen as a solution to the monetary
overhang, as the best way to fight budget deficit an inflation, as
an instrument of restructuring and creating competitive market
structures and as mean for attracting foreign investments
(Lipton;Sachs: 1990:293-94). The type of privatization the society
chooses will also predetermine it's future social and political
foundations.

As far as from theoretical point of view the
implications of the change of the ownership structure can be
analyzed in the boundaries of the Principal-Agent approach, the
latter can be used as some theoretical basis for transition
economic policy. This theory can be successfully applied to the
problems of the interdependence between the competitive
(olygopolistic) market structures, ownership and economic
efficiency. It is also an useful tool for the study of the role of
the financial markets and the different techniques of privatization
(Winiecki: 1992:271-77). The Principal - Agent approach is
especially insighting for handling with disequilibrium situations
and taking into account the role of the information at micro level.
In the same time, the complexity of the problems of the systemic
change of the post-communist economies is far beyond the boundaries
of the Principal- Agent theory.

1.2. The Catastrophe as a Solution

1.2.1. The Special Concept of Meaning under
Discontinuity Analysis

Some times the catastrophe approach to the economic
and social problems is criticized (Sussman;Zahler:1978) on the
basis of it's pretended lack of originality and uninformative
character. In fact, the catastrophe theory implicitly implies a
new, more narrow approach to the problem, which Samuelson (1983:5)
formulated as a need for meaningful economic analysis. From
Samuelson's point of view, given economic theory is meaningful when
it suggest a hypothesis about empirical data, which can be refuted,
if only under ideal conditions. One of the founders of the modern
catastrophe theory, R. Thorn, put the supposition, that the
topological complexity of the form should be considered as a scalar
measure of the information. As far as the catastrophe theory is
based on the circumstance, that any sudden radical shift in the way
of functioning of the complex systems, given little change in
conditions, can be described by variation of it's topological
complexity, we can make the conclusion, that any catastrophic
model, which really describes a qualitative reswitching, is by
definition more informative, than a similar non-catastrophic one.
This is a simple consequence

The transition as a catastrophe: from theory to
policy

of the fact, that the information itself is a
measure of the complexity of a system and the catastrophe describes
a transition from (through) one type (level) of complexity to
another, a kind of shift which, also by definition, cannot be
consistently interpreted without some discontinuity theoretical
framework.

From catastrophic point of view any non-
catastrophic theory should be non-informative, because it describes
different states or different dynamic paths of the same system. On
the contrary, meaningful is only an explicit hypothesis about
empirical data, which implies a change of the topological
complexity of an economic system, and can be refuted under strict
conditions. It is not difficult to admit, that the continuous
systems are only limit cases of the more general discontinuous
development.

1.2.2. Catastrophe and Entropy

As far as the catastrophe theory is about the change
of the regime of functioning of complex systems, the general rules
operating the information in such structures should apply. It's
well known, that the survival of a system (regime), depends on it's
ability to generate as much variety within it's boundaries, as it
exists in the form of threatening disturbances from the
environment. The entropy, as a measure of the average amount of
information, required for identifying of the observations by
categories (Krippendorff:1986:19), is the variable, which reflects
the system's ability to control the disorder. The increase or
decrease of the entropy denotes some kind of structural development
(negative or positive), which eventually may lead to systemic
transformation. The relation between the entropy and the
topological characteristics of the system is formulated by the
Thorn's hypothesis, that the greater the topological complexity of
a system, the lower it's entropy (Thorn: 1972:140).

From the point of view of the particularities the
economic systems, the phenomenon of entropy implicitly implies the
existence of non-price rigidities (Roy: 1990:16), in the case of
market dominated economies, and of decentralized resource
allocation, under central planning. In other words, both market and
command systems are supposed not to achieve an all-inclusive
economic control. The economic entropy is generated by both the
irreversible character of the natural processes, involved in
production, and the human behavior.

In general, the risk averse economic agents may be
supposed to contribute to the decrease of entropy, and risk takers
- to it's increase, given the multiplication of the number of low
probability activities. In the case of prevailing market conditions
the risk takers may be expected to engage into non-market
information- based (entrepreneurial) operations, and under central
planning - into market clearing ones.

The transition as a catastrophe: from theory to
policy

1.2.3. The Catastrophe Approach as a
Complementarity. Theoretical Framework

As stated above, both the free market and the
central planning cannot achieve in practice full control over
economy - neither prices are sufficient statistic, nor the planning
is possible without prices. So, in both the command and market
economies uncertainty exists, every economic process is eliminating
(ex ante and ex post) some entropy respectively. Given the fact,
that the transition is a complex phenomenon, the final entropy
flow, describing this process, would be a sum of different flows,
produced by the change of multiple economic stock and flow
variables. The rate of increase or decrease of individual flows
will depend on the intensity and direction of given economic
change, on the one hand, and on the variation (inclusive
distribution shifts) of the associated probability, on the
other.

The mutation may take place in different spheres
(supply, demand, investment, foreign trade, money supply etc.), and
may be subject of study of different theories, but the final result
(the path of transition, if any) will be determined by the
interplay of these various processes. As far as the transition may
be achieved in fact only under some specific combination of
different structural changes, measured by the dynamics of the
respective entropy flows, and which cannot be interpreted in
principle in any "metanarrative" framework, the catastrophe
approach presupposes some coordination of the different theoretical
lines of thinking on the basis of their relative importance,
explicative capability and relevance under transition conditions,
emphasizing their mutual complementarity and relativity, rather
then alternativity.

The logical basis of this possible coherence is the
fuzzy set theory (Murphy: 1991:146). If we can measure the
plausibility of "membership" of given economy in the command and
market states sets respectively, we can design a transformation
model. Such transition premise would be not only an instrument for
the interpretation of the real economic processes, but also a shift
from one logic to another.

Having in mind, that we are interested in the
predominant membership states, we can conclude, that any consistent
transition theory (model), should be an explicit or implicit
hypothesis about economic dynamics as an discontinuous image under
a function on the basis a fuzzy set state variable, reflecting the
deviation from the transition (50% membership) point and control
(parametric) variables, measuring the entropy dynamics. This
definition has "strong" structural discontinuity features
(Vercelli: 1991:55) in the sense, that it presupposes, under the
right choice of the state variable, both an alteration of the
equilibrium properties of the system and change of the sign of the
disequilibrium characteristics.

The transition as a catastrophe: from theory to
policy

1.2.4. Managed versus Forced Catastrophe

The sudden switch to another regime of functioning
of the studied system is not something new in the economic theory
or history. Different kinds of threshold effects are analyzed in
many models, based on various theoretical considerations. The
catastrophe approach as such is already applied to the problems of
the technological progress, stagflation, space economics,
monopolist behavior, business cycles (including long waves),
financial crashes, exchange rates, Philips curve etc. Moreover,
attempts are under progress to reformulate the foundations of
economic analysis to explicitly include economic discontinuities
(Rosser;Barkley:1991).

As far as the regime shifts are inevitable during
the evolution process of any economic system, two types of change
are possible - an unexpected crisis or aimed restructuring. In the
first case the main intent of the theory and respective policy
should be to avoid or to smooth and overcome the consequences the
sudden disruption of the continuous path of the economy. In the
second case however, the task is relatively more complicated. The
theory should formulate under which conditions the change of the
modus operandi of the respective system is possible, whether the
new regime is stable, should the system go through a period chaotic
behavior, are different sequences of policy measures possible,
which is the socially optimal path of transition and whether the
restoration of old structures is likely, given some inappropriate
policy measures set.

2. THE SELECTION OF THE RIGHT
CATASTROPHE

2.1. Constructive and Destructive Catastrophes

R. Thom (1983:176-177) distinguishes two types of
temporal interpretation of the "meaning" of the all seven
elementary catastrophes - destructive and constructive. From the
point of view of the transformation from a command economic system
to a market one, this division is essential. The constructive
catastrophe can be considered as some kind of process of
diversification and sophistication of the old structures, which
eventually leads to transition to another type of functioning of
the system. A destructive catastrophe from this point of view is a
procedure of dismantling of the old institutions in the context of
some self-organizing process of an emergence of the new
structures.

It is evident, that any variant of transition
economic strategy should involve both type of processes.
Nevertheless, constructive or destructive trends should prevail for
any given point of time, at least in some subsets of the economy,
if a shift is to take place. It is also possible to consider
different periods with alternating constructive and destructive
nature.

The transition as a catastrophe: from theory to
policy

Additionally, the fuzzy set theory permits some
other inductive statements. The fuzzy logic framework
(Schmucker:1984) presupposes two types of transition- through an
average market economy set membership plausibility increase, or
through a process of concentration (reduction of the degree of
membership of the economic units, which are only partially
market-oriented). The latter is evidently some kind of market
selection process, which should eliminate the inefficient economic
agents. The famous hard budget constraint is nothing, but one the
rules of such selection.

The shock therapy can be classified as predominantly
self-organizing, selection based catastrophe, and the gradualist
approach - as a constructive and "average" one. It must be added,
that the type of transition the society chooses, should be a
function not only of the initial economic and political conditions,
but also of the expectations about the results of the
implementation of different approaches, in the sense, that these
expectations are not trivial (some of the consequences of the
transition are maybe unpredictable) and cannot be considered as
fully rational. So, the path of transition should be expected to be
always to some extent an arbitrary one.

2.2. Structural versus Global Approach

The transition from command to market economy is
both some kind of internal evolution of a given national economy
and a global process of interaction between different segments of
the World-System. The first approach presupposes an explicit
description of the internal economic organizational structures and
the process of their mutation. The latter should include a concept
of interdependence and co-evolution of the core, semi-periphery
(the subsystem of command economies) and periphery (Third World),
or should be based on some space economic model in a catastrophe
inspired framework. Both lines of thinking are consistent and
mutually supportive.

On the other hand, it is clear, that we can analyze
the consequences of the COMECON dissolution for the world trade,
financial flows, technology exchange and for the world economic
order as a whole, mainly in global perspective. The same is true if
we consider the failure of the command subsystem as a result of the
evolution of the world economy. Nevertheless, for the purposes of
the national economic policy, the World-System framework is neither
sufficient, nor always directly applicable. The emphasize of this
paper is on the national economic policy level, hence on the
structural analysis.

The transition as a catastrophe: from theory to
policy

2.3. The Cusp Catastrophe as a Basic Model

The Cusp (or Rieman-Hugoniot) elementary catastrophe
describes all the possible variants of the transition of given
system from one locally optimal state to another. The main problem
is the choice of the state variable, or the variable, which can
reflect the relative importance (degree of membership in fuzzy
terms) of market and non-market forces in the resources allocation
of the respective economy. In the same time, this variable should
be a Lebesgues measure in classical terms (probability), or
plausibility in fuzzy language, and should reflect the mutations of
the internal organizational and institutional structures of the
economic system.

Such a variable maybe the average degree of
"shortage" (excess demand) of the economy. This paper relies on a
"fractal" interpretation of the Say's low, which means, that
exchange take place between not perfectly informed economic agents
and with prices for the identical products not necessarily the same
between different sellers and buyers (the price is not a perfect
market signal). In such a fractal, not fully integrated by market
or central planning economic system, the average probability of
"shortage" (impossibility to buy spontaneously a product at given
price at fixed point of time and space) is supposed to equal the
average probability of excess supply. It is evident, that under
this formulation, the "shortage" (or more exactly the positive or
negative excess of shortage over 50%) will reflect the relative
importance of equilibrium (market) and disequilibrium (command)
forces. It also permits the implementation of the strong
discontinuity structural change conditions as far as it implicitly
distinguishes between entropy and negaentropy flows. Another
consequence is the possibility, that the economy can be in command
regime even without central planning. This concept implies in the
same time non-negligible cost of market information, finite
endogenous time horizons and incomplete market structure.

The so described economic system is in equilibrium
when the marginal productivity of information equals it's marginal
cost. The quantity of information (entropy) the system produces,
depends on the number of goods, buyers and producers, their
relative distributions (relative parts), the average shortage and
it's distribution, and on the time horizon, the economic agents are
facing. The latter can be explained by the fact, that the quantity
of simultaneous equations for present and future prices, which the
economic system "resolves", depends linearly on the time
perspective, the economic agents have. In this framework, the
equilibrium growth rate of the economic system can be considered as
a function of the rate of increase of it's entropy - as stated
Hayek, the economic problem is not merely how to allocate "given"
resources, but rather a question of the utilization of
decentralized knowledge

(1976:77-8).

The transition as a catastrophe: from theory to
policy

Now, if we separate three subsystems - "production",
"supply" (marketing) and "demand", we can construct a Cusp
catastrophe economic model with national income as a discontinuous
function and average shortage as a state variable. The demand is
supposed to depend on the probability for successful (more than
fifty percent) spontaneous exchange of money against goods at given
price, the supply is logistic activity with probability equaling
the probability of two simultaneous exchange operations, and the
production is a combination of two independent logistic activities.
This implies, that the production and supply are less controlled by
the market or central planning, than the demand is, hence the
supply side is an endogenous flexible constraint to demand. Another
consequence of these formulations is the different level of
identification of macro and micro states. At the most aggregated
level (demand) the economic agents are identified through their
preferences, reflected by prices, at the supply level they appear
as concrete buyers and sellers and finally as interdependent
producers.

Only the interplay between these three subsystems
can give us an informationally complete picture of the economy.
Without discussing the details, we must only add, that the adopted
information description presupposes both risk and uncertainty.

Finally, if for simplicity sake we consider the
number of the goods, economic agents and respective distributions
as constant, we can express the rate of increase of entropy by the
rate of advance of the average time horizons, the economic agents
of the three different subsystems are facing. As far as these
horizons can be relatively easily approximated on the basis of the
available macroeconomic data (GDP, the volume of inventories and
uncompleted construction, monetary aggregates), we have the
possibility to measure the change of the Cusp equation constants
and so to study the different variants of transition.

Technically, the model should represent the rate of
growth of real national income as a function of production, supply
and demand time horizons rate expectancies.

The model can be extended to take account not only
of the change of "vertical" complexity of the economic system (time
horizons), but also of the variety of goods, concentration of
market power, the role of private sector, foreign trade and other
variables.

3. PRELIMINARY THEORETICAL AND
SIMULATION RESULTS

3.1. Conditions, Variants and Stages of the Cusp
Catastrophe Transition

According to Zeeman (1977:5), there are five types
of behavior of the Cusp catastrophe system - bimodality,
inaccessibility, sudden jump, hysteresis and divergence. Any of
these states cannot be excluded a priori from the analysis. For the
purpose of this paper however, we should be most interested to
determine the intensity and direction of entropy flows,
reflecting

The transition as a catastrophe: from theory to
policy

the kind of internal restructuring of the economy,
which makes possible the shift from command to market dominated
resources allocation.

The catastrophe model of the transition is based on
the idea, that the "shortage" is a quick variable, and the time
horizons of the different types of economic agents are slow ones,
in the sense, that they adapt to the changes of the former. We also
suppose, that the first derivate of the potential function in
respect of the state variable, reflects the marginal productivity
of information. All the states of the economic system, for which
the first derivate becomes zero, can be considered as locally
optimal, given the respective values of the coefficients and
control (slow) variables. They also form the manifold of
catastrophe dynamics.

From institutional point of view, the transition
from command to market economy can be only a process of replacement
of the concrete common ends by common abstract rules (Hayek:
1989:63). Such shift makes sense if it unables a process of
coordinated individual optimizing behavior, leading to higher
efficiency. As far as the processes by definition a disequilibrium
one, the prices are not supposed to be sufficient statistic, if
socially optimal outcome is to be achieved.

Under non-neoclassical price environment, duality
does not hold, hence the economic agents should be expected to
maximize pecuniary incomes, given desired inventory and money
stocks. This maximization does not imply cost minimization and
optimal resource allocation. The transition adjustment should
consist in sequence of unconstrained disequilibrium optimums. In
other words, under transition it is not a priori clear whether the
imposition of common abstract rules is more efficient, then the
existence of concrete ends. The socially optimal solution should be
expected to be some dynamic "mixture" of the two regimes in fuzzy
sense.

The start of the process of the liberalization of
the economy should leave the economic agents with stocks higher,
then optimal (if not, the central planning had been optimal, hence
the transition does not make sense). The stock adjustment process
triggers entropy flows (a downward shift of the time horizons),
reflecting high information costs. As far as the former depends on
some stock-flow ratios, the proportions between the rates of change
of different variables gives the economic agents the necessary
information about the frequency of reconsidering the desired stock
levels. Finally, we have a disequilibrium, self-correcting
transition adjustment process.

The transition strategy can be based on two
approaches - radical economic reform (shock therapy), relying on
the self-organizing forces of the economy, and gradual
restructuring, presupposing the possibility of some kind of market
institutions design, transition fine tuning and resource allocation
decisions. These two strategies are not in fact mutually excluding.
Both radical and gradual approach should include two main stages -
first, dominated by destruction of command mechanisms and second,
dominated by market based restructuring.

The transition as a catastrophe: from theory to
policy

3.2. The Shock Therapy as a Sudden Jump

The shock therapy is evidently a pure variant of
destructive catastrophe, based on "big bang" type liberalization
(dismantling of centralized state control of resources allocation
and price formation). Our catastrophe model shows, that a necessary
(but not sufficient) condition for such a jump is the following
equation:

(1) Ts3 / Tp Tb
2 = - 27 a1 a32 /8
a23

Where Ts is the rate of change of the
time horizon of supply, and Tp and Tfi are the rates of change of
the time horizons of producers and demand, and o. , a2 and
a3 are structural coefficients.

The time horizon of demand is supposed to equal the
inverse of income velocity of money, the time horizon of supply
equals income/inventory ratio, the time horizon of production is
more complex, depending on income, money supply and inventory
stock. As a consequence, Tb equals the difference between the rate
of growth of money supply and current income, Tp is the
difference between the rate of income and inventories, and
Tp depends on the income, inventory and money rates, as
well as on the absolute levels of inventories and money supply.

Given the initial conditions and the type of
optimization behavior, we can find the initial values of tb
, ts and tp. We can also define the rates
of the money supply, inventories and income.

The differences between rates reflect rates of
change of time horizons, and ratios, as mentioned, should give the
economic agents the information about the necessary frequency of
reconsidering the level of shortages, taking into account the new
levels of money and inventory stocks. We have now two main
possibilities - coordinated and disjoint adjustment. If we consider
that all economic agents have access to the same macroeconomic data
(money supply, inflation, growth) we can suppose, that they have
the same frequencies of adjustment (probably, the ratio between the
rates of income in current prices and the rate of money supply),
hence the adjustment process should be coherent. We also can
suppose, that the quickest (the slowest) adapting subsystem
dictates the general speed of (or supplies the information for)
adjustment.

Nevertheless, the coherence is not highly probable,
given the fact, that macroeconomic information in post-communist
countries is usually not easily available and completely reliable,
the difference between the aggregate and decentralized information
and the necessity of some kind of preliminary agreement between the
agents. If coordinated, the process can converge to the condition
(1). Even in this case, the transition is highly unprobable,
because it implies inacheavably low levels of shortages. It is
important to emphasize, that without the introduction

The transition as a catastrophe: from theory to
policy

of different subsystem's time horizons, any
transition is impossible or must be a painful selection
process.

The coordinated shock therapy transition should go
through three main stages. The first stage is dominated by the
demand adjustment and is characterized by income velocity of money
acceleration. The higher the inflation at this stage, the deeper
the economic collapse. It should be noted however, that the slump
is not immediate, but depends on the reactions of the slower
subsystems. At the second stage the fastest subsystem is supposed
to be the supply, given the decrease of inflation and the reduction
of inventories. This can be interpreted as an adjustment of the
marketing strategies under the new conditions. The last stage
should be the adjustment of production subsystem. This process is
the most complicated and depends simultaneously on the monetary,
inventory, inflation and income adjustment. As far as the
transition is hardly achievable after the firs attempt, we should
expect several cycles of this market - oriented adaptation, hence
quick and slow adjusting subsystems will alternate.

It should be mentioned, that the rate of price
increase is an endogenous variable in this model. The inflation is
also the cheapest way to change the time horizons from individual
economic agents' point of view. In the same time, it is the most
expensive from social standpoint, raising the marginal cost of
information. At the optimum the two tendencies are balanced.

At figure 1 are presented some results of the
computer simulation of Bulgarian economy. They are based on time
series regression coefficient estimates and different hypothesis
about the transition. Y is the national income at constant prices,
and d is a measure of the average shortage. The instable point A,
styled by high inflation and velocity of money dynamics, is a point
of possible jump from non-market to market state of economy. As far
as such shift is in practice impossible, the adjustment process can
continue only if point A will move towards the transition point 0.
It means that, after high initial negative growth rates the economy
will gradually achieve zero rate and next perform the transition,
stabilizing in predominantly market economy membership state with
positive growth rate.

If the adjustment process is disjoint, the different
subsystems (production, supply and demand) will rely on different
degrees of precision of information and slow (production) and fast
(supply, demand) adapting subsystems will appear. In such a case,
the system is simultaneously at three different levels of
shortages. This means, that periodically the fast adjusting
subsystems should come back and realign with the slow one(s). An
other possibility is to consider that the quick subsystems are
supplying the slow ones with more accurate information, but the
periods of reconsidering the current adjustment behavior remain
different. The organizing center in catastrophic terms, or
production subsystem, will finally dictate the rate of transition.
The system as a whole should experience chaotic dynamics with
prevailing negative growth.

The transition as a catastrophe: from theory to
policy

In this theoretical framework the dynamics of the
transition will depend on initial conditions (money and inventory
stocks), structural properties of the concrete economic system and
the way the economic policy influences the agents' behavior. Of
course, the economic policy can influence the dynamic path of
transition through initial conditions also - if an Erhard type
monetary reform precedes the price liberalization, the transition
adjustment process can be radically facilitated. This conclusion
coincides with the findings of other authors (Edwards: 1992:135-8).
On the other hand, if the initial conditions problem is ignored by
the policy maker, it will reappear under bad debt accumulation
phenomenon after the first stage of the shock therapy.

As admitted Stiglitz (1985:28-9), under equilibrium
with supply not equaling demand, the adverse selection and credit
rationing are the most probable outcome. The bad debt problem
reflects the simple fact, that the stock adjustment process is
asymmetric in the sense, that it affects economic agents in
different way- the relatively more short term based economic
activities are favored at the expense of the more technologically
sophisticated and long term oriented ones. After an Erhard type
monetary reform, the transition adjustment should be expected to be
more symmetric and less adverse selective.

The other important topic is the economic policy
impact. As far as the common concrete aims are rejected under shock
therapy by definition, the only important thing is the rules of the
game formulation. In Eastern Europe, the hard budget constraint
paradigm is the theoretical basis for all market oriented reforms.
The hard budget constraint is usually understood in purely
financial terms (nominal anchors, tight orthodox monetary policy
and state budget deficit control), ignoring the price environment.
Nevertheless, the hard budget constraint have different meanings
under market and command economic regimes. It is not accurate to
state, that the command economic system is incompatible in
principle with a hard budget constraint. The problem is, that under
central planning, the hard budget constraint presupposes not only
financial, but also centralized price and income control. Only such
complex discipline may induce cost reducing behavior and avoid the
transfer of the firm specific inefficiencies on the consumer under
command framework.

In the case of perfect market conditions, the firm
is supposed to be a price taker, so a hard financial constraint is
a sufficient condition for a cost minimizing behavior. It is
evident however, that under disequilibrium dynamics, the tough
financial restraint is not by itself satisfactory tool for cost
reduction. Price control in monopolized sectors and
productivity-oriented income policy are the other necessary
components if a "real" hard budget constraints are to be
introduced. The tight monetary policy can be in fact "softer"
restraint, than the centralized control. The empirical evidence of
the productivity fall in Eastern Europe confirms this conclusion.
On the other hand, a more gradual price liberalization and
subsidies reduction process maybe appropriate
(Calvo;Coricelli:1992:14).

The transition as a catastrophe: from theory to
policy

In fuzzy set terms a hard budget constraint shock
therapy must be an "intensification" process, which is supposed to
eliminate the inefficient economic units and increase the ratio of
market oriented ones. Once again, the non-neoclassical price
environment makes such selection procedure contradictory. The
policy maker have three choices - to postpone all exit and entry
decisions in the state sector until a stable transition in shortage
terms is achieved; to base the decisions on broader then
profitability, considerations; and to accept an "intensification"
at different speeds for the various sectors of the economy on the
basis of their relative market performance. The best framework for
all of the three types of policy is some structural adjustment
program. Nevertheless, we should agree, that the shock therapy is
not the best way to resolve the "intensification" problem, the
latter must be analyzed in some long term evolutionary perspective
(Murrell: 1992:35-53).

From Neo-Austrian point of view, the shock therapy
is an implicit entrepreneurial revolution. In other words, under
the bounded rationality price environment of the transition,
economic agents are expected to rely more on intuition, than on
precise calculations. Given the fact, that under some circumstances
the catastrophe equation may not have real solutions and, as a
consequence operations like < and > are not defined, an
optimizing behavior may not be possible for some periods, hence the
entrepreneurship is really important. On the other hand, if the
most part of economic agents behaves like entrepreneurs, the cost
of information should remain high and transition will stop.

The leading transition figure should be not the
entrepreneur, but the rational professional manager. It must also
be mentioned, that the welfare effects of entrepreneurial-led
transition process should be negative too in terms of both output
and Pareto-optimal income distribution.

The shock therapy can be analyzed under the angle of
the accumulation of information-storing structures (Ayres:1988). As
far as this is a costly process, the information becomes important
externality, reflecting both the uncompletness and the imperfect
nature of markets. The process of creation of new structures can
even induce vicious circle(Krueger: 1992:222). In such a situation,
as argued Arrow, the economic agents have to rely on rational
expectations, based on information other then prices, so the free
market information advantages disappear (19X7:210). This means, in
Hayek terms, that the optimal transition should not ignore the
common concrete aims, on the one hand, and should actively support
the elaboration of the system of common abstract rules, on the
other.

3.3. Alternative Transition Policies

There are two alternatives to the shock therapy-
some kind of managed shock transition and purely gradual
restructuring.

The transition as a catastrophe: from theory to
policy

The main shock therapy transition shortcomings are
it's high social cost and high probability of chaotic hysteresis.
The latter, from the point of view of the assumed theoretical
framework, means that periods of increasing inventories and
production are followed by periods of decreasing shortage and
negative growth. To avoid this, the policy makers may try to manage
the shock.

The Cusp catastrophe equation have two control
variables. These variables depend on the rates of change of the
subsystems' time horizons. The time horizons desaggregates in two
flow rates (inflation and real income) and two stock rates (money
and inventories). If the "concrete aims" are forbidden, the policy
maker can influence only the market environment through monetary,
tax and eventually demand policy.

It can also support the establishment of market
institutions. The essential role of monetary policy is evident. If
the policy maker adopt an orthodox monetary policy, relying heavily
on the positive real interest rates, the shock is hardly manageable
because of the lack of degrees of freedom. In order to increase the
number of instruments, the central bank should introduce credit
ceilings to control inflation and interest rate policy to influence
the income and inventories. The system still should not be
manageable as far as the credit ceilings under disequilibrium
conditions may influence the money growth and inflation in
different directions, on the one hand, and the interest rate
evidently have mutually excluding impacts on income and
inventories, on the other. The system also does not have a "point
of reference", the usual money targets and nominal anchors being
too arbitrary. In such a situation we can introduce the exchange
rate, the price control in the monopolized sectors and the income
policy as an inflation gearing instruments. In order to separate
the income and the inventories we need a demand management.

The only unresolved problem is the targeting of the
policy. The most natural aim and point of reference for the success
of the market stabilization program, is the decrease of the
shortage. A suitable measure of the level of the average
disequilibrium can be the relation R / M , where R is the value of
inventories in current prices and M is the money stock. Given the
initial conditions and expected agents behavior, reasonable
shortage targets can be established. A set of subtargets for money
supply, interest rate, exchange rate, budget deficit and other
variables can be introduced. Finally we can receive a dynamic
transition policy framework.

In addition to this, as already mentioned, the
policy maker may influence the initial conditions through monetary
reform. Another option is to support the process of market
institution and organization emergence. The imperfect information
and the uncompletness of the markets being the main flaws of the
looming structures, the emphasize should be put on capital markets,
stock and foreign exchanges as well as on the future markets. An
other important topic are the property rights. A non-orthodox
monetary policy, based on obligatory reserves maybe more
preferable, then the credit ceilings or be combined with them. Such
approach may permit

The transition as a catastrophe: from theory to
policy

separate treatment of the problems of high credit
risk under disequilibrium conditions, and money supply. It also
should facilitate the demand oriented policy through the greater
possibilities for privileged state budget financing.

The sketched dynamic transition policy should permit
to coordinate the transition adjustment and to avoid the danger of
chaotic hysteresis. It is also expected to accelerate the
transition and to decrease it's social cost. The main idea of the
managed shock is to combine the positive sides of the shock therapy
(emphasize on the self-organizing forces of the economy) and the
gradualism (manageability).

The rational basis for a pure gradual approach from
the catastrophe theory point of view is the fact, that to achieve a
transition, the economy does not need in principle to go through
critical situations. In this case however we should drop the ban on
the common concrete aims. Only with some kind of centralized
control on the resources allocation the gradual transition is a
feasible solution. In the Cusp catastrophe framework, the gradual
transition should have two stages. At the first stage the time
horizons of production (organizing center) and supply (the normal
factor in catastrophic terms) subsystems should increase or remain
constant. The demand time horizon (splitting factor) should
decrease (income velocity of money increases). This can be
interpreted in the sense, that a gradual price liberalization is
combined with demand management and investment supporting policy
measures, in order to avoid a production collapse. Export-led
growth policy measure should also be appropriate.

The next stage presupposes positive time horizons
growth rates for the all three subsystems. This means a gradual
state allocation policy substitution for efficient capital and
future markets. Such type of transition probably presupposes a
stable, South Korean- Japanese kind of political system. We can
make also the conclusion, that a more realistic description of the
transition process should be based on two dimensional (economic and
political) framework.

An important weakness of the gradualist type
transition strategy is it's complexity and the need for a
relatively long preparation period, as well as it's implicit
dependence on the scarce foreign capital and insufficient internal
savings.

To resume we can add, that, contrary to the usual
conclusions, the higher the initial distortions of the economy, the
higher the need for urgent measures, but simultaneously, the
stronger is the economic consistency of a gradual transition. So,
the policy makers should choose between the relatively easy to
start shock therapy and the more complex to implement gradual
approach. Fortunately, a shock therapy start do not exclude a
gradualist oriented completion. A managed shock therapy variant
seams also possible.

The transition as a catastrophe: from theory to
policy

3.4. Further Research and Extensions

At this stage, only general theoretical background
and some computer simulation, based on data of Bulgarian economy
are performed.

Further research should be concentrated on the
problems of stability and optimal growth paths of transition. Some
issues can be interpreted more rigorously in a Bayesian games
equilibrium (Laffont: 1991:51-68) framework. Another important
topic is the specification of the different variants of transition
strategy in the context of instrument-target interplay. The
theoretical background of this paper permits more complex approach
to the restructuring of post-communist economies. The introduction
of the foreign trade, for example, is not a trivial extension, as
far as the export is a supply, and the import a demand type
activity, hence the exchange with the rest of the World (where, in
addition, a different level of shortage prevails) alters the whole
modus operandi of the economy. The role of the emerging private
sector and the privatization also can be incorporated into the
model.

Another interesting field is the analyses of the
problem of transition from a more pronounced evolutionary point of
view. In this paper only some macroeconomic aspects (different
reactions of the subsystems) are studied. If we drop the hypothesis
about the constant distribution of shortages between agents and
sectors, we can describe a selection process under catastrophic
framework.

One of the aims of this work was to avoid the
strongly criticized in the literature ad hoc character of the most
part of the economic catastrophe theory applications. As a result,
the implemented joint entropy-catastrophe-fuzzy set approach could
be useful not only for the transition models. All kind of economic
policy regime shifts or Schumpeterian technological "Historical
Reswichings", can be interpreted in this framework. The contingency
for implicit institutional mutations handling, makes possible it's
application for the study of the long term structural evolution
processes of the economic systems.

4. OTHER CATASTROPHES

This paper emphasizes on the cusp catastrophe as the
most appropriate model of the process of transition from command to
market economy. The choice of this model relies on the hypothesis,
that the studied economic system really can function both under
command and market regime, and that it's economic weight is
insignificant from the point of view of the World-System. When
these conditions do not hold, other elementary catastrophes can be
actuated.

The transition as a catastrophe: from theory to
policy

The Fold type catastrophe may describe a transition
with full destruction of the old regime and new beginning. The East
Germany unification is an example of such process. The Swallowtail
equation, including three control variables, may model an
unsuccessful transition- probably the perestroika in the former
USSR.

The Butterfly catastrophe is associated, according
to R. Thom, with the system Source-Message-Receiver. This four
control variables function can be applied in the World-System
context. The source of innovations (the core) interacts with the
message (the command segment, which main strategy is the imitation
of core technologies under non-market economic conditions in order
to became independent of the industrial center), and receiver (the
Third World), which plays a passive role, imitating both the center
and the command economies.

The Umbilic type catastrophes (Hyperbolic, Elliptic
and Parabolic) are of more complex type, including interplay
between causes and consequences (the equations contain two state
variables). This kind of behavior can be interpreted at the
World-System level as a complex state of cooperation and
competition, involving international institutions (Hyperbolic
Umbilic), common targets (Elliptic Umbilic) and common instruments
(Parabolic Umbilic). The Umbilic catastrophe models would be the
most appropriate tool for the study of the process of transition as
some kind of reintegration of the command subsystem into the world
market economy. These kind of theoretical metaphors can be applied
also for the description of the transition as a two dimensional
evolution- economic and political, economic and environmental or
other combinations.